Investing in companies like Santos Ltd (ASX: STO) can be tough on an investor because you don’t get to see the ultimate impact of lower commodity prices until several months after the fact.

Santos released its second quarter 2016 results to the market this morning. Here’s what you need to know (all figures are in US Dollars):

  • First half production rose 10% to 31.1 million barrels of oil equivalent (mmboe)
  • Average realised oil price declined 29% to US$43/barrel in the first half
  • ‘Upstream’ production costs reduced by 15% to $8.80/barrel
  • Gas sales rose 10% after the first full quarter contribution from the second LNG train at GLNG project
  • Santos also updated its full year guidance to US dollar terms (reflecting a recent decision to begin reporting in US dollars)
  • Upstream production costs estimated to be $9.50 to $10 per barrel for the full year
  • Depreciation, depletion and amortisation to be $800 million
  • Capital expenditure to be $750 million, $283 million spent so far
  • Brent oil now trades at US$46 per barrel, suggesting lower prices have finally caught up with Santos’ bottom line

So What?

Santos has trimmed all its capital expenditure right back, with exploration expenses less than a quarter of what they were at the same time last year. Development and restoration expenses have also been cut by over 50% in order to preserve the company’s cash flow. While the company did not report cash flows today, investors will be able to see those in the half-yearly report due out next month.

After the company’s perilous financial situation last year was rectified by an emergency capital raising, management has slashed non-essential expenditure to the bone while prioritising output and development of near term prospects. This has boosted production, albeit unfortunately in a low price environment which can only accelerate the decline of Santos’ fields and reduce the returns on their initial investment.

Depending on how long low prices persist, I would watch Santos closely as the company may not be able to replace its wells as easily with such low exploration and development spending. Since the company is also no longer trading at such bargain prices, I feel it’s tough to find a lot of value in the business, especially when compared to Oil Search Limited (ASX: OSH) or Woodside Petroleum Limited (ASX: WPL)  which I prefer due to their more robust financial position.

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Motley Fool contributor Sean O'Neill has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.